Open economy, strengthen state, ease inequality

The President’s three prime tasks

PRESIDENT Gloria Arroyo has left her successor a dysfunctional state, falling global competitiveness and continuing mass poverty. Can President Benigno Aquino 3rd begin to set things right?

Though he would want every Filipino to call him by his nickname, all we really know of “P-Noy” is his political pedigree. He seems the very opposite of his overtly expressive and charismatic father.

What’s certain is that, given the concentration of power in the presidency that has occurred over these 40 years, there will be few constraints on his political authority.

By itself the orderly transition should help, since instability set off by the corruption of both economic and political processes has plagued our country during this last decade. President Aquino will have popular support as he strives to repair our broken social system—to heal what Church rhetoric describes as “our wounded people.”

No common social goals

Our weak sense of unity remains the basic problem. Extreme competition for the economic advantages of political office has resulted in the widespread politicization of national society. Even the economy is governed more by politics than by markets.

Early on, the civil service had become a prize of the spoils system. Factionalism has become anarchic. And, as the Jesuit sociologist John Carroll has noted, this division of politics “reinforces individualism and impedes the acceptance of common social goals for the nation.”

Rebuilding public ideals

The new President’s immediate task is to rebuild our public ideals—to restore the bonds of trust between citizens and those who govern in their name. These have been frayed by the impunity well-connected grafters had enjoyed, and the Arroyo Administration’s disdain for public opinion.

Once he has eased these short-term problems, Mr. Aquino must turn the economy toward full participation in globalization. He must also raise the political commitment necessary to mobilize resources and reform institutions for equitable growth, rural development and relief for the poorest Filipinos.

Opening the economy

Of the longer-term tasks, the most urgent is that of economic opening—through privatization; the dismantling of cartels and monopolies; and the easing of oligarchic influence on policymaking.

Here President Aquino must expect resistance—because protectionist tendencies still run below our surface show of welcome for foreign investors. But we cannot do without their capital, technology and managerial expertise, since our domestic savings are well below those our neighbors could generate.

At the same time, he must begin to build stronger institutional foundations for development. Apart from building up the civil service, he must also encourage the growth of true political parties able to think coherently of the national interest.

President Aquino’s third task is to ease income and social inequalities. In Bangkok recently, we saw what could happen once these social cleavages become unbridgeable. And the main instrument should be “affirmative action” programs for our hardcore poor, which we should embark on as soon as state finances permit.

Slow, uneven growth

Economically, our basic problem is what University of the Philippine (UP) economist Arsenio Balisacan calls “slow and highly uneven growth.”

Between 1976 to 2000—according to the Economist Intelligence Unit—our country averaged yearly gross domestic product (GDP) growth of only 3.1 percent.

Over the same quarter-century, South Korea averaged 7.6 percent; Malaysia 6.8 percent and Thailand, 6.5 percent. Even Indonesia managed 5.4 percent.

Until now our economy has colonial characteristics. Our principal exports—electronic components and garments and the new BPOs (business process outsourcing)—are enclave industries, with few linkages to the domestic economy.

Remittances from overseas workers now make up as much as a tenth of GDP. They fuel consumer spending and the real estate boom.

Despite the 7.3-percent growth over January to March, joblessness is up and growing. Enrolment has been decreasing and dropout rates rising in 49 of our 78 provinces.

This early, National Economic and Development Authority (NEDA) has given up on its goal of having all children of the right age in elementary school by 2015.

Stepchild of development

In Japan, Taiwan, South Korea and China, agrarian reform catalyzed industrial modernization. Among us agriculture still is the stepchild of development—though three-fourths of all our poor depend on it for their living.

The landed elite has defeated every effort at agrarian reform—in the 1990s through massive land conversion to industrial use. The President’s agrarian policies will be closely watched, since his family’s hacienda escaped redistribution through a legal maneuver that awarded “stocks” instead of land to its tenants.

Building state capacity

P-Noy must match government’s activities with its capabilities—focusing them on the core tasks crucial to development.

Building state capacity should involve raising the legitimacy and effectiveness of state institutions—freeing regulatory agencies from the control of interest groups—and enabling them to act autonomously.

Authoritarian rule has upset the checks and balances of democratic government. We need to restore to Congress its constitutional power of the purse; and to the Supreme Court its political distance from the presidency.

Hostage to spoils system

Arroyo’s “Strong Republic” was no more than a car-plate slogan: she has left us East Asia’s most ramshackle bureaucracy. Mr. Aquino must begin professionalizing the civil service—as the first step in controlling corruption.

It will cost money. Public-sector wages in our country are only about one-fourth those of the private sector. In other East Asian states, they average 70 percent.

But he could begin by giving up to the Civil Service Commission his right—as incoming president—to appoint the bulk of an estimated 4,800 bureaucrats and heads of public corporations, down to assistant-bureau-director level. This theoretically decapitates the civil service every time an administration changes.

Puny tax effort

In the World Bank’s view, the weakness of the Philippine state “stems from the effective control by interest groups of the state machinery, such that rule making and enforcement serves not the general welfare but particular interests.”

Nowhere is administrative weakness more apparent than in its tax effort—which is the lowest among comparative East Asian economies. From its peak of 17 percent in 1997, tax collection is down to 12.4 percent, despite the higher value-added tax.

With the 2009 budget deficit reaching P300 billion, we face once again the prospect of debt-service crowding out social spending. Yet the Fourteenth Congress made no effort to pass revenue bills rationalizing fiscal incentives to favored corporations and indexing “sin” taxes on tobacco and alcohol.

In 2007, NEDA’s Romulo Neri estimated that regulatory capture of the agencies supervising aviation, ports, the maritime industry, telecommunications and energy costs the State between P100 billion and P200 billion in potential yearly income—and reduces average GDP by between one and two percentage points yearly.

Strengthening political parties

Building state capacity also requires strengthening political parties. Representative government cannot be anything but party government.

Most of our so-called parties—the Commission on Elections listed 162 of them in 2001—have no structure and little durability. There is no shared belief, no agreed-on approach, to governance. A President’s policies are his own—and no one else’s. With every change in administration, governance starts virtually from scratch.

Will charter change help? Shifting to the parliamentary system could begin to move the burden of accountability from individual politicians to institutional parties.

Its “confidence” requirement creates a strong incentive for the ruling party to maintain voting discipline. But parliamentary government might merely worsen our factional tendencies—producing “revolving-door” governments—just as it did in Italy after World War II.

Easing absolute poverty

As a direct result of our economic and political failures, poverty is worse than it is in Malaysia, Thailand, China, Indonesia and even Vietnam. We still host Southeast Asia’s last Maoist rebellion.

Contrary to the regional norm, Philippine poverty has in fact been growing. In 2006, 33 percent of all our people were subsisting on individual incomes below the minimum level the state determines as necessary to live decently in our country.

The figure is up from 30 percent in 2003, according to government’s Family Income and Expenditure Survey, which are done every three years. UP economists expected the poverty rate to rise to at least 35 percent for 2009, because of the global recession.

Our two nations

“Shared growth” was the key achievement of the East Asian “miracle” economies. But in our country rich and poor are separating—like Disraeli’s England—into The Two Nations.

Gross inequality seems to be distorting even the conventional economic outcomes. In East Asia, because of egalitarian public policies, a percentage increase in GDP growth typically reduces poverty incidence by 2 percent.

But in our country a 1-percent increase in growth may be accompanied by a 0.3-percent increase in the number of the poor. This is because growth is so highly concentrated and trickle-down has such narrow limits.

Fully 65 percent of GDP is generated in Metro Manila and its satellite regions, Central Luzon and Southern Tagalog. In 2000 poverty incidence was nine times higher in the poorest region, Bicol, than in Metro Manila.

Rising hunger

According to Social Weather Stations, hunger among Filipino families has multiplied four times in the last six years: from 5 percent in 2003 to 20 percent in 2009.

Yet the economist Joey Salceda, who advised Arroyo, estimates that between 2001 and 2009 the yearly profits of the 1000 top corporations increased by 21 percent, while return on investments increased by 15 percent.

Meanwhile our middle class is shrinking. It was down to 19.1 percent of all Filipinos in 2006—from 22.7 percent in 2000 and 23 percent in 1997.

Focus on the absolutely poor

So what are we to do? In my view, the key lies in concentrating our scarce public resources on lifting up the lives of our absolutely poor families.

Out of every 100 Filipinos, the World Bank classifies 15 as being “absolutely poor”—which the bank defines as subsisting on the equivalent of $1 (at 1985 prices) daily.

We must focus government’s efforts on these poorest of our poor. And we must stop non-poor groups with political influence from “capturing” social services meant for the voiceless, unorganized poor.

Affirmative action for the poorest

State intervention has traditionally favored the well-endowed regions. Government must begin to practice positive discrimination on behalf of ethnic minorities and the poorest regions, provinces and towns.

Over these next 10 to 15 years, we should increase social spending in our poorest regions—until at least their health, education and infrastructure levels approximate those of the average region. This presupposes we must first make peace with our agrarian dissidents and restive ethnic communities.

In sum, “P-Noy” must do more than preside over the further unfolding of our democracy of faction. He must set out a series of national goals that will engage people’s civic spirit. He must point us toward an overriding national purpose. He must set out for us a vision of the national future—a goal toward which we can all work together. –JUAN T. GATBONTON MANILA TIMES EDITORIAL CONSULTANT, Manila Times